Tax cuts for the rich

by Russ Roberts on December 8, 2010

in Taxes

A few observations on extending the Bush tax cuts:

1. The action is not a tax cut for the middle class or the rich. It is a decision not to raise taxes. It is only a two year rather than a permanent extension so I don’t know if the incentive effects are very large.

2. People argue that we should raise taxes on the rich because they have gained x% of the increase in income since 1980. There is no “they” there. The people who were in the top 1% today are not the same people who were there in 1980. Some of them are dead. Some dropped out of the top 1% because they made bad decisions or had bad luck. Some of the top 1% today were not there ten or twenty years ago. Sergey Brin and Larry Page founded Google. They were not in the top 1% in 1980. They were 7 years old. Their parents as far as I can tell were not in the top 1%. Now they’re both very wealthy because they created something that is gloriously pleasant in our lives. Thank you, gents. Some who were in the top 1% are still in the top 1% and received a lot of income and wealth by making great products are providing great services. Bill Belichick might be in that group. In 1980 he was an assistant coach for the New York Giants. He was probably very well paid. Now he makes a lot more as head coach of the New England Patriots. Congrats, Bill, on your commitment to excellence and your success. And some in the top 1% were there in 1980 and are still there because they feed at the great rent-seeking trough. Wall Street, please get a life like the rest of us where bad financial decisions have consequences.

3. Whether you think any of these people should be taxed more than they currently are is mix of philosophical issues, incentive issues, and market forces. Some people seem to think that all tax increases on the rich are good because the ideal distribution of income is one where everyone gets the same access to consumption. That is not my ideal and I do believe there are eventually incentive effects from raising marginal tax rates. I don’t think we have a very good idea of the magnitude of those effects. I also think that much (most?) of any tax increase is offset by changes in pre-tax wage rates. This last inconvenient truth is usually ignored by people on all sides of the tax debate. It is just presumed that changes in tax rates have corresponding effects on the distribution of income. This is not true.

4. It is always good to have some idea of what the rich actually do pay in taxes. It’s also good to remember that payroll taxes are not personal investments and add to the tax burden. They should be eliminated and replaced by a more transparent system.

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